Industry Super Secrets Revealed!

Industry super funds have spent a lot of moneyadvertising their products over recent years sayingthat they are cheap and the best super optionsavailable.

So we decided to put this to the test and comparethe major industry super funds to some of the bestalternatives available. What we found may shockyou.

Whilst they might be “not-for-profit” and theydon’t pay “commissions” to financial advisers,industry super funds still pay large salaries tointernal financial advisers whose job it is tho selltheir own products. These salaries are really justanother name for commissions aren’t they?

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For example, if your industry super adviser thoughtthat there was another super fund better suited toyou, they are not allowed to tell you because thefund they work for would prohibit it.

And (my school teacher wife will kill me for startinga sentence with and) whilst industry super fundscan be a lot cheaper than some other options inthe market place, they are certainly not “cheap”and they certainly cannot claim to be “the best”.

Check out the information below which comparesthe average industry super fund to some otheralternatives and you will quickly realise what weare talking about.

FeesThe costs for the “average industry super funds” were taken from an independent report produced by Chant West(Chant West Multi-Manger Quarterly Survey – March 2012). We have based these cost comparisons on someone with$50,000 as a starting balance and a $60,000 gross salary (receiving 9% in employer contributions whilst also salarysacrificing an additional 5% of their salary into super each year). It also assumes the person is 40 years old and willretire at age 65. Finally, once retired, we have assumed that they will withdraw 5% of their super balance for spendingpurposes in year one, and then increase the dollar amount of this withdrawal each year by 3%. The average cost forSelf-Managed Super Funds has been taken from the ATO report, ‘Self-managed superannuation funds: A statisticaloverview 2009-10’ (released in April 2012)’. In this report the ATO state that the average cost of SMSF’s is around$4,480 per annum. If you would like us to compare your current superannuation, refer to the free offer at the end ofthis report.

Insurance rankingsThis is an overall ranking which takes into account a number of factors such as premium rates, type of cover andproduct features. For example, there are many industry super funds that only offer a two year benefit on their incomeprotection, whereas both the alternative options offer a benefit period to age 65. This means if you are on an IncomeProtection Claim, the super fund will only pay you for a max of two years even if you are still injured or sick whereasthe alternate options will continue to pay you until age 65. The Self-Managed Super fund has scored a lower ratingbecause here you are generally not able to negotiate as good a premium price as what you would get by being part ofa larger fund. This is because a larger fund that has thousands of members can often negotiate cheaper premium rateson your behalf as they are buying in bulk.

Tax efficiency rankingThis is an extremely critical area and one that most super funds fail to discuss. The tax efficiency ranking takes intoaccount a number of factors. For example, one of the factors taken into consideration is the ability to directly receivefranking credits from the underlying companies you’re invested in. Franking credits are effectively tax refunds paidback to you (i.e. in your super fund). Not all companies provide the benefits of franking credits. Let me explain this in alittle more detail.

It all starts with a dividend. When a company makes a profit they can decide to pass on part or all of that profit to itsshareholders in the form of a dividend. The shareholder then has to declare those dividends as income in their superfunds tax return and potentially pay tax on those dividends.

Superannuation Score CardAverage industry

super fund inAustralia

Self-ManagedSuper Funds

Alternative

Fees (estimated lifetime cost) $176,170 $201,600 $32,850Insurance product ranking Tax efficiency ranking Ability to choose companies you want to invest in. × Access to industry leading Term Deposits × Access to conflict free financial advice ×

Now, depending on the company you own shares in, the Australian government may give the shareholder a refund oftax that the company may have already paid before distributing those profits to shareholders. This refund is called a“franking credit” (if I lost you here go back and read this paragraph a few times!).

Now, as already mentioned, not all companies receive the benefits of franking credits. This can make a huge differenceover a long period of time. For example, let’s compare two super funds. Let’s assume the return on these two superfunds is identical but the only difference is that the first super fund only invests in companies that pay fully frankeddividends, and the other invests in companies that do not pay franked dividends. Here are the results:

Super fund 1 – full franking Super fund 2 – no frankingOpening balance $60,000 $60,000Yearly employer contributions $10,000 (indexed by 3% p.a.) $10,000 (indexed by 3% p.a.)Estimated dividend return 4% 4%Estimated growth in share price 3% 3%Estimated balance in 20 years $796,253 $647,409

The average industry super fund and just about all default funds do not provide direct access to franking creditsbecause of their investment structure. With the right fund, you can get the flexibility to structure your fund towardsmuch more tax effective investments.

Furthermore, with the vast majority of industry super funds, you do not have the ability to control any potential capitalgains tax issues. For example, if the investments you have chosen within your super fund have returned a capital gain,with the right fund you are able to time the sale of these assets to reduce (or even eliminate) any capital gains tax.Again, most default funds do not offer this level of control or benefit.

Ability to choose the companies you invest inThe average industry super fund does not give you the ability to choose the actual companies to invest in. Forexample, if you wanted to use your super to buy some shares in CBA, you do not have this level of flexibility with theaverage super fund. Having this level of control can provide significant benefits. For example, it directly relates to yourability to obtain a more tax effective investment structure as explained in point 3 above.

Access to industry leading Term DepositsThis feature is generally not available in most of the industry super funds.

Access to conflict free adviceMost industry super funds offer financial advice to their members (usually at an additional cost). Now not that theseadvisers aren’t fully qualified, but the problem is they are paid to recommend their employers own products only. Soeven if they know of a better alternative product out there, they are simply not allowed to recommend it.

So whilst industry super funds may come across as “independent” they are far from it. The problem is, there are over18,000 advisers in Australia and the vast majority of them work for a particular product manufacturer (meaning thatthey can only recommend their employers own product). Unfortunately I don’t see this getting any better in the nearfuture, in fact, if I had to guess I would say that the number of independent advisers will continue to shrink simplybecause they do not have the marketing dollars to compete with these big conflicted advice chains.

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Free Offer?

If you’ve made it this far, we just wanted to remind you of our limited time offer to have us compareyour super funds to see if you could be getting a better deal.

If you wanted to take advantage of this offer you can submit your request by clicking here.

Click below to have us compare your existing superannuationfunds and see if you could be getting a better deal!

Once you have submitted your request someone from our team will give you a call to collect thenecessary information we need in order to produce your free report.

The information above is of a general nature only and does not constitute personal financial advice. This is because it has been preparedwithout taking into account your personal circumstances or objectives. As such without obtaining this specialist advice, the reader ofthis document takes full responsibility for using the information contained in this document. If you are unsure as to whether theinformation in this document is right for you, you should seek advice from a licenced financial adviser who is authorised to providefinancial product advice.

Please remember that our general advice is based on assumptions considered to be reasonable, but does not guarantee future results.Also, investments can go up and down and past results are not necessarily an indication of future results. For more information about usplease refer to our Financial Services Guide at www.investforliving.com.au/disclosuredocs.

This guide has been published by the financial advisers at Invest for Living. Invest for Living is a 100% subsidiary of Carlton FinancialServices Pty Ltd, which is in turn a Corporate an Authorised Representative of Dover Financial Advisers Pty Ltd (AFSL 307248). Invest forLiving Offices are located at The ClockTower, Office 15, 255 Drummond St, Carlton VIC 3053. T 03 9347 4554E vince@investforliving.com.au

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